Market Insights – 08/05/2022

[music] Hello I'm Anthony Okolie filling in for Greg Bonnell and welcome to MoneyTalk Live which is brought to you by TD Direct Investing. Coming up in today's show we will get perspective on the strength of the US economy with TD Economics Thomas Feltmate and TD asset management Hussein Allidina what will give us his view on why the high price of natural gas made here to stay. In today's web broker, education segment, we will discuss the potential methods for investors to handle volatility. Forming into that, let's give you an update on the markets. Here in Canada, we start with the TSX index, down 120 points. .6%, of course the big influence there in materials and technology driven into the downside. We will take a look at some of the stocks that are moving. Suncor energy was up earlier on in is down slightly, .8%. Of course Suncor just recorded better than second-quarter earnings. Let's move south of the border, the S&P 500 Index, more read on the screen, down 35 points about .8% loss. It was down more than 1% following the stronger-than-expected US jobs report. Taking a look at the NASDAQ 100 Index, lost by 220 points and change, down 1.7%. Taking a look at some of the big movers on the US stock exchange, Lyft is up almost 14%. Lyft shares are higher of course thanks to better-than-expected second-quarter earnings performance. Some other movements, Doordash up 1.6% of course the food delivery reported a 30% year over the jump in the second quarter. Meanwhile a total number of orders delivered to 23% in the same period. An aftermarket update. [music] Today the big focus was on the latest jobs numbers. In Canada, the economy unexpectedly shed jobs for the second straight month. Indicating a softening of economic growth. Digging into the numbers, full-time jobs accounted for a larger share of the decline. Hours worked also fell. TD Economics believes that a drop in the hours could be a signal of a soft monthly GDP print. After a flat may, despite the weak jobs report TD Economics expects the Bank of Canada to continue hiking rates this year, taking the policy rate to a 3.25% rate at year end. Turning to the US, prior to today's US job report some are asking whether the world's largest economy is already in a recession or about to enter one, especially after two quarters in a row of negative GDP growth. But this morning's report should put almost any fears in the US economy in recession. The US economy adding over 500,000 jobs coming in well above forecast. Again of 250,000 jobs. What does that mean for Fed policy going forward? Well TD Economics says that these job gains are not sustainable. And that today's report supports the view that the Fed will likely hike interest rates at the end of the month ahead. Staying with the US economy, earlier we heard from Thomas Feltmate senior economics at TD Economics who discussed whether the US is in a recession or on the brink of one. >>… Certainly started to ring some bells that the US economy could already be in a recession. Two quarters of contraction economic growth is one, I would say, relatively narrow measure of whether or not an economy is in recession. But the thing that we really need to consider is the National Bureau of economic research, the research institute that is really in charge of dating business cycles, they look at a whole host of other economic indicators as well and trying to determine whether or not an economy is in recession. So they look at things like employment, production, retail sales, that sort of thing. Measures of income as well. Certainly when we look at all these things, there is still quite a bit of promise showing in terms of the US economy not yet in a recession. You know, if we focus on the employment of the economy for one second, the US economy is at a 2.7 million jobs… A very healthy pace of hiring still. The unemployment rate at 3.6% is still near historic lows. We are also looking at things like job openings. They have certainly come in. There is still 1.8 jobs for every unemployed person that is currently out there actively looking for a job. So definitely from what we are seeing in the labour market standpoint, it would suggest that the US economy is most deftly not yet in a recession. Now, coming back to the GDP data, I think there are some areas of concern, particularly, we are seeing some doubts that there could be some measurement error in GDP. When we look at the movements of GDP, which would be kind of the expenditure side of the economy and we compare to things like gross domestic income which is just the income side of the economy so every dollar that is spent needs to show up somewhere as income, those measures typically move together over time we have seen a more recent divergence suggesting that there could be some underlying issues in how GDP might be measured. It could be underestimating some of the economic activity that is still present in the economy today. Now that is not to say that we haven't seen some slowing in economic growth. Certainly more recently, we have seen consumer and business sentiment really come in. That is starting to come through on measures of consumer spending. We are seeing a pretty strong pull back there inactivity. So definitely seeing some signs of slowing but not necessarily in a recession just yet. >> So certainly the Fed has said that they are more data dependent as opposed to providing guidance. So, the investors of course saw that the Fed hiked interest rates and they're still waiting to hear from the Fed. What are your thoughts about the Fed's latest rate hike? >> I think it was in line with our expectations. Certainly the June CPI number was really what kind of tipped us off that they were likely to do another what they're calling "supersize" rate hike. Further acceleration in CPI… We know that this is on the Fed's radar right now. Price stability is kind of their key aspect that they are targeting right now and inflation is running too hot and they would like to bring it back to the Fed's targeted 2%. That means that rates need to become more restrictive quickly. Certainly, chair Powell has pointed to this more recently about the importance of quickly bringing monetary policy from what was previously a very accommodative state to one that would be very restrictive. As quickly as possible. So, in doing so, that kind of warranted the 75 basis point hike. >> So this super hike, is it enough to tame inflation? Certainly, we have heard about inflation expectations coming and that the Fed might actually have to be more aggressive. Have they done enough to tame inflation and can they do it without causing recession? What are your thoughts? >> That is a very good question. I would say where we are now, no not necessarily. They have not done enough just yet. Where the policy rate sits today at 2.5% is basically in line with the consensus view over the neutral rate is. The neutral policy rate, the best way to think about that, the interest rate that is neither restrictive or accommodative. Because we know they are trying to get the economy into a more restrictive territory. That suggests that the interest rates are and I need to come up even more in order to tame inflation. Like I said, we have started to see some slowing and economic data. Suggesting that the previous rate hikes are starting to have some effect. But still, we have not seen inflation necessarily turned yet. That is certainly a key factor that is going to play into how future interest rate hikes proceed. You have already alluded to the fact that Chair Powell is going to move to this more data dependent way of viewing rate hikes. … If we get two of each for the next Fed meeting will certainly factor into whether or not, rather how much more we are going to see in terms of rate hikes this year. Now if you look at the consensus view among members, they are currently predicting that we will have another hundred basis points alone in hike. Bringing it into restrictive territory. Now whether or not it is going to tip the economy in a recession, I think most forecasters are still trying to work through that and gain some better understanding there. I think certainly, looking at the employment numbers over the next couple of months will be pretty telling. Because, like I said, there is still a disconnect there in terms of still seeing really strong job growth and not necessarily something that will be indicative of a recession. But we know these things can surly turn quick. >> That was Thomas Feltmate Senior Economist at TD Economics. Stay tuned, on Tuesday of next week, we will hear from Beata Caranci chief economist at TD Bank. Now here's a look at how the markets are trading. Markets are reacting to today's job numbers on both sides of the border. Here in Canada, the economy lost nearly 31000 Jobs in July. Coming in well below estimates for a gain of 15,000 jobs. According to stats Canada, the services sector took the brunt of the losses including wholesale and retail trade, healthcare and social assistance. Despite the job losses, the unemployment rate held steady at an all-time low of 4.9%. Meanwhile, it was a much brighter picture in the US, with the economy adding a whopping 520,000 jobs far surpassing economic expectations. The unemployment rate inched lower to 3.5% after holding a 3. 6% for four straight months. The gains mark the 19th consecutive month of job growth. Good news on the jobs front was a bad news for Wall Street. US stock markets dropped on the strong report which investors see as a signal that the Fed will be forced to hike rates even faster to cool economy. Turning to earnings news, Suncor reported profits of almost $4 billion in the second quarter which is more than four times what it earned in the same period last year. Earnings were refuelled by higher crude prices amid supply fears driven by the Russia Ukraine conflict. The Calgary-based oil producer and refiner said production from its oil sands assets rose in the second quarter due to increased production at its Syncrude and Fort Hills sites. And here's how the main benchmark index in Canada is trading. . . . NASDAQ 100 Index is down hundred and 89 points and change to 1.4% decline. The cost of natural gas is recently hit levels not seen since 2008 and according to Hussein Allidina, head of commodities at TD asset management those high prices may be here to stay. He joined the earlier to discuss. >> Depends primarily on supply import to Russia. The situation in Russia particularly as it relates to, one which is the pipeline which brings our supply, volumes have been quite low. Europe started the Summer with a relatively tight level of supply on the heels of a cold winter last year. Europe for years has been divesting from producing natural gas domestically. Very dependent on imports. From Russia. Those volumes have been lower. All that is obviously being exacerbated now by warmer than normal weather in Europe which is stoking demand for natural gas. It is at a time when, frankly, the timing is horrible. > We have certainly seen the news about the heat waves in England and the rest of the country. Walk us through just how natural gas prices are important to the US economy. >> Natural gas is important globally. It's very important in Europe primarily because it is a cleaner fuel relative to, you know, oil, relative to coal. So Europe has moved away from those dirty oil and coal towards natural gas. But the gases honestly coming… Or not coming, from Russia today. We've seen in the course of the last several months industrial shutdowns announced part. Whether it is fertilizer, alumina smelters and the like because the cost is so high. Ultimately, at today's prices, I think you're going to continue to see European industry come under pressure because the math doesn't work with these elevated levels. Very important. >> Was a cost of these levels for producers to produce? > It's costing for the producers or for industry to operate for sure and it's also quite painful and challenging for the consumer as well. Because your member, natural gas is a feedstock for power generation and part of the reason why you have a record high, never before seen prices for power in Germany and France is because of what's happening to the natural gas. >> You said the risk of natural gas running out as we head into the winter is certainly potential. Why do you think that might play out? >> >> The highest period of natural gas demand is winter. Increased power generation demand… We always worry that we are not going to have sufficient supply entering the winter. Today, if I look at the United States as an example, if we have normal weather, we should be fine. The risk is, and if you are a power stream who provides power to my house, they have to be able to deliver power when I call for it. So obviously, very concerned about cold weather. When they do their modelling on how much they need to have for the winter, they assume weather is not normal. They assume weather is going to be much colder. >> Yes much colder. >> And depending on that, there is potential that we run out. This is why Allie think you were seeing prices move higher in an effort to meet demand to avoid that sort of outcome. >> What is a situation and meet Europe meeting for us in Canada and the United States? >> Today we are exporting, the US is exporting about 12 BCF a day. The market is about 95 a day right now. Just put into context,… When Freeport is back up and running… If Europe ends up being quite colder if Europe is not able to get the supply from Russia or elsewhere, they are going to call. We can't do much more than 12 BCF. But the challenge that we have is if we get colder weather and we are still exporting 12, 13 or 14 BCF a day to Europe, we run into issues with our balance. So I think with the market is try to figure out is "where do I need to send a price in order to limit demand domestically?" If we end up in a position, Anthony, where we need to stop LNG from going to Europe, were talking about prices well north of $20 BTU. Europe is arty trading in those levels right now. If I want to close that, I have to disincentive eyes the cargoes from going in and it's not eight dollars a BTU that goes in that it's over 20. >> This suggests that natural gas prices will remain elevated for some time. What has to happen for to ease? >> I think prices will remain elevated, yes, because underlying in North America and Europe are tight. If we end up having a mild starch to the winter or, we have been waiting for US production to respond. I think a lot of folks thought that production in the US today would be at 97 and 96 and have BCF a day. We are only at 95. There are still expectations as a recount increases and as companies, you know, look to expand their production, production will grow. So your biggest risk to gas price on the downside here is a milder than normal start to the winter. And the start of the winter is particularly important. Because as the winter passes the risk of running a decreases. So a mild start of the winter in November and December as would an improvement in natural production and this Freeport energy facility which went off-line, stays off-line for longer than expected and is expected to come back in October and November. If it stays off longer than that is more supply that remains domestically. Those are factors I see in the near term but I think it is one that is still challenged because we have to invest the demand. That demand continues to grow. Particularly as people are moving away from oil and coal. >> Fossil fuels, exactly. >> Gas need to feed that. >>that was Hussein Allidina of TD asset management. Volatile market conditions may bechallenging for investors to navigate as emotions run high in asset prices change quickly. But there are ways to help navigate choppy markets and here to share some of them is Nugwa Haruna, Senior client education instructor at td direct and. Okay we've established that during market volatility asset prices rise or fall in some large and unexpected ways what order types are available to investors to manage their trade? >> We may see choppy performances from day-to-day. Investors also notice that there can be large daily swings in prices. Let's see how investors deal with rapidly declining markets. One of the options available to them would be something called a market order which they can utilize to exit a position really quickly. One of the advantages of that market order is that once I put my order in, as long as the markets are open, between 930 and 4PM Eastern standard Time, my position is executed right away. One of the things though is I don't have control over whatever that prices. Because my security will sell at the prevailing current price which, when were talking about rapidly declining markets can be a much lower price than I was expecting. So there are ways for investors to consider in one of the ways we will talk about today will be a stoploss order. What a stoploss order allows is an investor, who for instance, own security and is concerned about declining markets, a stoploss order allows investors to set something called a trigger price. Think about the trigger price, Anthony, as an activation price. In the event that a specific security experience is a rapid decline, the investor can set an activation price. What this means, is when the stock price at that price, the investor then wants to go in and put in an order. This allows an investor to set this in the system. You don't necessarily always have to be there checking to see if you want to place a trade right away. There are two types. There is the stock market where once the trade is activated it becomes a market order and then there is the stock limit. Where one, once it is activated, it becomes a limit order. How would an investor enter the stop loss order into web broker? >> Once in webbroker, an investor can click on the "buy and sell" order ticket which is going to use an index BTF. We are looking to sell 100 shares here. I can use my market to get out of this position but I don't have any control of the pricing. Once I click on my Price type I can change this to a stop market order. Once I click on that I get my trigger price and if I'm using a stopped market order I'm concerned about rapidly declining prices. So let's assume that if this price drops under $25, I am no longer interested in holding this position. So what the trigger price does for me is if the stock price starts to drop,… This $25 is not the price the investor receives. It is simply the trigger or activation price. So once again, the advantage is the rapidly declining markets, the investors can get into position really quickly after the security hits a price that they are no longer comfortable holding that stock on. The disadvantage though of using a stock market order is what happens if the stock price let's say, opens tomorrow at $20, much lower than my trigger price? In that instance, my order will go through at whatever the prevailing market price is. Which could be a disadvantage for that investor. So the investor could then consider using a "stop limit order" you will notice, when I hit him that an additional box pops up. Still the same idea. I have a trigger price, which after this price, I want to get out of position. But the difference is I still have or want to have control over whatever price my security sells for. So, this investor can set a limit price. In this instance we will use $23 and I would explain what this means. If the stock price experience as a rapid decline in hits $25, my order will be sent to the market as a limit order. So what this means is I want to exit my position but I'm only willing to exit my position as long as my stock price stays at $23 or more. Which means that if the price of that security drops under $23, I do not want to exit the position. I'm willing to sit and wait. That wait time will depend on whatever time I sat here with my timeframe. So once again, the advantage of this is I, as an investor, get to control the price I end up receiving. The disadvantage of this is I have been waiting a long time. If the stock is in freefall, the price may never come back to $23 and I miss out on being able to get rid of that security. >> Thank you so much. And for important information especially when we are seeing a lot of volatility this year. >> Thinks for having Anthony. >> That was Nugwa Haruna senior client education instructor TD Direct Investing. Make sure to check out the learning centre and web broker for more educational videos, live interactive master classes and upcoming webinars. Well, we started the show by looking at the world's largest economy and now were going to shift the to the world's second-largest economy, China. It is been hit hard by lockdowns and the zero code policy. But according to Haining Za, there are signs of optimism. >> If you change the way you view the data points, there are several things to keep in mind. Number one is you have to be a little bit of a contrarian. Because essentially, you want to underweight when the risk is under the radar and over way when the risk is fully exposed. Number two, you want to pay attention to the hiking cycle. Because it will impact the cross-border capital flow and the change in emergency market currency dynamics. Number three, you have to consistently pick the structural winter. So based on this, China is actually not in a bad position. I know in the second quarter economy, it actually registered 0.3% year-over-year growth. Nonetheless, based on that framework, all of the risks are well exposed, be it COVID risk, economy slowdown risk and many of these risks are being dealt with or are being moderated. Number two, the Fed is probably towards the end of its hiking cycle. Right now the market is actually pricing cuts in 2023. Number three, structurally, China is still a large, stable country with a huge consumer base and a very strong industrial production base. None of that has changed. So we maintain more constructive in China for the long term. >> You touched on the hiking cycle. You've seen the fed has increased interest rates recently. How is that impacted Chinese markets? >> Right. So, traditionally there are several channels to channel that impact into the Chinese economy. But I think the biggest one is when the Fed tighten the interest rates too much, all of the emerging market countries were each tightened with their rates. So to slow down economic growth's. But in this cycle, the dynamics are little bit different. Because of the COVID disruption, China is actually out of sync with the rest of the economies. So while the Fed is tightening its monetary policy, China's actually gradually moving towards the easing side but there are still constraints on how much they can do and I think when the Fed is towards the end of the hiking cycle, there are certainly a lot more things that can be done. At this point all of the pressure in real estate and economic numbers, I think, we remain optimistic in the second half. The central-bank will ease a little bit more to help support the marketing income. >> You said you are optimistic looking ahead. What about some of the risks to the Chinese market right now? What you sing there? >> I think the 2 Biggest Risks, #1: COVID if you look at the second quarter, the whole downturn in the economic number is actually very much COVID related. The second biggest risk would be real estate risk. It is been going on for quite some time. Recently there've been some headlines. Nonetheless, our scenario is the Chinese government and ultimately control that risk. It will not let it out of control like global financial crisis. >> That was Haining Za, portfolio manager at TD asset management. And will leave you with a final look at the markets before we go. Still some read on the screen for TSX,… Turning to the US, more reaction from the stronger-than-expected US jobs report. The broad-based 500 off its lows from the day. the NASDAQ also trading down. Stay tuned, on Monday, Michael O'Brien portfolio manager at TD asset management will be our guest taking your questions about Canadian equities. Just a reminder that you can get a head start, just email moneytalklive@td.com. That's all for our show today. Take care and we will see you next week. [music]